June 13, 2018 | Could This Be It?

Garth Turner

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics.
Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Besides legitimizing intolerance, objectifying women, praising dictators and dissing Mr. Socks, here’s another thing Trump fans can think their hero for – an escalation in the cost of money. On Wednesday the Fed grew a pair and joined the president in manspreading.

American interest rates ticked higher. It was the second increase this year and the 6th in the last 18 months. The central bank also indicated there are two more hikes likely in 2018 and another three in 2019. That’s five more ahead, adding 50% to the basic funds rate.

So much for all those world-beating macroeconomists in the steerage section of this blog who said, nah, never gonna happen. Rising rates are fake news. The government won’t let it happen.

Well, it happened. And it’s not over yet. The Bank of Canada will follow suit on July 11th (the current market odds of a jump in its rate are about 75%), and it’s expected there will be another in the autumn. The mortgage stress test rate, now at 5.34%, will rise to almost 5.9% by Christmas. Next year it will cross 6%. So it would be a swell idea not to make an offer on any piece of property until at least next summer.

Why is this happening even when Trump is trying hard to start a global trade war which could have significant economic consequences?

Because the Fed obviously believes he won’t do it, or will fail, or be handcuffed by Mueller, or shackled by Congress. And meanwhile the American economy is shifting into overdrive, which will stoke inflation and cries out for an even hand on the tiller. That would be the paw of Jerome Powell, the new boss at the world’s most influential central bank, who has turned aggressive.

“The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2 per cent objective over the medium term,” he said, curling his lip and tensing his abs under the $3,000 Armani. The old language about waiting for data, being cautious and accommodative is gone. We have clearly turned a corner.

US unemployment has cratered to 3.8%, the lowest reading since 1969, when my cuffs were wider than my waist and folks were singing “Sugar, Sugar.” More than 1,000,000 people have found new jobs in the first six months of 2018. Wages are rising (in both the US and Canada) and the Fed now expects the jobless rate to keeping dropping – which means statistical full employment. In fact there are 6.7 million job openings in the States right now, more than all the unemployed people put together.

Economic growth is forecast to be steady and acceptable in the 2% range, with a big boost in economic activity of $1.5 trillion from the Trumpian tax cut – which slashed the corporate rate and helped push equity markets higher. Yes, the deficit and national debt will be bloating as a result, but in the short-term it’s all rockets.

Well, our guys will not resist the upward trajectory of money, unless the Canadian economy is T-boned by Trump’s new trade tariffs, new levies on the auto industry or the potential demise of NAFTA. It would have to be a serious downturn to keep the Bank of Canada from pacing the Fed, since the failure to do so would hit the loonie hard, increasing the cost of imports and stoking harmful inflation.

But in either scenario – four to six more rate hikes in the next 18 months, or a crapped-out economy in the midst of a trade war – real estate does badly. People without balance or diversification, who have shoveled all their net worth into one asset and leveraged it up are now at greater danger. Already sales in most major markets are falling rapidly and prices have started to react. Buyers are retreating. They smell risk. It’s pretty obvious houses will cost less in a year than they do now.

Here’s young Trevor to explain it in his own words:

A few posts ago you had talked about the 905 market north of Toronto and how it had basically cratered. I decided to have a look for myself to see what the carnage looked like. The observations were bang on. I was almost ready to scoop up a townhome in Aurora at a big discount …. until the trade war began. I decided not to pursue it anymore because the trade war poses significant risks to the economy (specifically the auto industry)….I remember previous posts where you had mentioned that a serious blow to the Canadian economy could turn the soft landing into something much worse. The auto tariffs could lead to massive job losses…… Could this be it? Or am I being overly cautious?

See what I mean? The market is slowing fast. Listings are swelling. Lots of choice plus desperate sellers. Prices in many areas are tumbling. And yet buyers back away – which will simply accentuate the decline as people worry about Trump and as interest rates notch higher.

Those who said rates would stay low were wrong. Those who said buyers would rush in if prices fell 10% were nuts. This will be a long ride.